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The second row of [link] provides data on trade in services. Here, the U.S. economy is running a surplus . Although the level of trade in services is still relatively small compared to trade in goods, the importance of services has expanded substantially over the last few decades. For example, U.S. exports of services were equal to about one-half of U.S. exports of goods in 2014, compared to one-fifth in 1980.
The third component of the current account balance, labeled “ income payments ,” refers to money received by U.S. financial investors on their foreign investments (money flowing into the United States) and payments to foreign investors who had invested their funds here (money flowing out of the United States). The reason for including this money on foreign investment in the overall measure of trade, along with goods and services, is that, from an economic perspective, income is just as much an economic transaction as shipments of cars or wheat or oil: it is just trade that is happening in the financial capital market.
The final category of the current account balance is unilateral transfers , which are payments made by government, private charities, or individuals in which money is sent abroad without any direct good or service being received. Economic or military assistance from the U.S. government to other countries fits into this category, as does spending abroad by charities to address poverty or social inequalities. When an individual in the United States sends money overseas, it is also counted in this category. The current account balance treats these unilateral payments like imports, because they also involve a stream of payments leaving the country. For the U.S. economy, unilateral transfers are almost always negative. This pattern, however, does not always hold. In 1991, for example, when the United States led an international coalition against Saddam Hussein’s Iraq in the Gulf War, many other nations agreed that they would make payments to the United States to offset the U.S. war expenses. These payments were large enough that, in 1991, the overall U.S. balance on unilateral transfers was a positive $10 billion.
The following Work It Out feature steps you through the process of using the values for goods, services, and income payments to calculate the merchandise balance and the current account balance.
| Exports (in $ billions) | Imports (in $ billions) | Balance | |
|---|---|---|---|
| Goods | |||
| Services | |||
| Income payments | |||
| Unilateral transfers | |||
| Current account balance |
Use the information given below to fill in [link] , and then calculate:
Known information:
Step 1. Focus on goods and services first. Enter the dollar amount of exports of both goods and services under the Export column.
Step 2. Enter imports of goods and services under the Import column.
Step 3. Under the Export column and in the row for Income payments, enter the financial flows of money coming back to the United States. U.S. investors are earning this income from abroad.
Step 4. Under the Import column and in the row for Income payments, enter the financial flows of money going out of the United States to foreign investors. Foreign investors are earning this money on U.S. assets, like stocks.
Step 5. Unilateral transfers are money flowing out of the United States in the form of military aid, foreign aid, global charities, and so on. Because the money leaves the country, it is entered under Imports and in the final column as well, as a negative.
Step 6. Calculate the trade balance by subtracting imports from exports in both goods and services. Enter this in the final Balance column. This can be positive or negative.
Step 7. Subtract the income payments flowing out of the country (under Imports) from the money coming back to the United States (under Exports) and enter this amount under the Balance column.
Step 8. Enter unilateral transfers as a negative amount under the Balance column.
Step 9. The merchandise trade balance is the difference between exports of goods and imports of goods—the first number under Balance.
Step 10. Now sum up your columns for Exports, Imports, and Balance. The final balance number is the current account balance.
The merchandise balance of trade is the difference between exports and imports. In this case, it is the difference between $1,046 – $1,562, a trade deficit of –$516 billion. The current account balance is –$419 billion. See the completed [link] .
| Exports | Imports | Balance | |
|---|---|---|---|
| Goods | $1,046 | $1,562 | –$516 |
| Services | $509 | $371 | $138 |
| Income payments | $561 | $472 | $89 |
| Unilateral transfers | - | $130 | –$130 |
| Current account balance | $2,116 | $2,535 | –$419 |
The trade balance measures the gap between a country’s exports and its imports. In most high-income economies, goods make up less than half of a country’s total production, while services compose more than half. The last two decades have seen a surge in international trade in services; however, most global trade still takes the form of goods rather than services. The current account balance includes the trade in goods, services, and money flowing into and out of a country from investments and unilateral transfers.
In 2001, the economy of the United Kingdom exported goods worth £192 billion and services worth another £77 billion. It imported goods worth £225 billion and services worth £66 billion. Receipts of income from abroad were £140 billion while income payments going abroad were £131 billion. Government transfers from the United Kingdom to the rest of the world were £23 billion, while various U.K government agencies received payments of £16 billion from the rest of the world.
Central Intelligence Agency. “The World Factbook.” Last modified October 31, 2013. https://www.cia.gov/library/publications/the-world-factbook/geos/gm.html.
U.S. Department of Commerce. “Bureau of Economic Analysis.” Last modified December 1, 2013. http://www.bea.gov/.
U.S. Department of Commerce. “United States Census Bureau.” http://www.census.gov/.
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